The vision or goals of a nation should be consistent with the aspirations, opportunities, and genius of its people. At the least, the goals should be home-grown and set indigenously. Unfortunately, our government seems to be in thrall to foreign forces including multilateral organisations. The major goals of the nation during the last several years have been the achievement of the Millennium Development Goals (MDGs) and attaining the ‘Middle Income’ status. These were enshrined in the Perspective Plan and the 6th Five Year Plan. The MDGs have been envisaged by international bureaucrats or experts in the UNO, and middle income is an operational classification of the World Bank. While one could drum up some arguments in favour of the former as the collective goals of the member nations of the UNO agreed at the Millennium Summit, it is the latter that is difficult to accept as a goal of a proud nation.

The World Bank is a multilateral lending institution involved in development work all around the developing world. To determine its operational lending policy, the World Bank divides the client countries into several categories such as low income, middle income (lower and upper), and high income. Although the lower middle income threshold coincides with the operational threshold for ‘granting civil works preference to eligible domestic contractors in evaluating civil works bids procured under international competitive bidding,’ it does seem that concessional loans are given mostly to the low income countries, and lending terms become increasingly harder as a country moves up.

For example, the loan for the botched Padma Multipurpose Bridge project was to be interest-free (but with a service charge of 0.75 percent). Hence, the concessions are substantial. The World Bank cannot earn much revenue from its loans to low income countries. When a low income country moves to a middle income status, it gradually loses some of these concessions and hence, has to pay more to service the same amount of debt. A recent news report revealed that the repayment and grace periods on IDA concessionary loans to Bangladesh have been reduced, which effectively raises the average per annum debt service payments. The country may expect increases in debt service payments in the near future.

It is not difficult to see why the World Bank should be keen to see a fewer number of low income countries. The objective is facilitated by a low threshold income for graduation. Currently, a low income country with a per capita gross national income (GNI) in excess of $1045 per annum (but below $4126) is classified as a lower middle income country. This is undoubtedly a very low income at which a very large fraction of the population of a country would be below the abject poverty level of $1.25/day. (According to World Development Indicators 2014, 43.3 percent of the population of Bangladesh was below this threshold in 2010 at 2005 international prices. The percentage rises to 76.5 at $2/day.)

Nonetheless, the World Bank regards this income as sufficiently high to extract more from poor countries. The operational classification of the World Bank has resulted in nearly three-fourths of the world’s poor living in middle income countries by the end of the first decade of the new millennium. Almost all poor people lived in low income countries only two decades ago. Since the per capita real incomes of the low income countries are increasing and the middle income threshold has remained virtually constant in real terms for over four decades, there will not be many low income countries left by the end of the third decade of the millennium. Should a sovereign nation elevate a lending institution’s operational category to a national visionary goal?

Although the threshold income for graduation is expressed in US dollars, it is not the same as the US dollar at market rate. The dollar used for this purpose is derived by employing ‘Atlas method’ which takes into account both the variability of the dollar exchange rate and the divergence of country’s inflation rate from the inflation rates of the major countries. The per capita GNI of Bangladesh as calculated by the World Bank, and that estimated by BBS are reported in the Table included below. These estimates are not the same since the BBS estimates are based on market exchange rates while the World Bank uses the Atlas method.

If one looks at the trend of the GNI per capita of Bangladesh as estimated by the Atlas method, there can be little doubt that it will exceed the lower middle income threshold by a considerable margin when 2014 GNI data are made available. If so, Bangladesh would have already crossed the threshold income of $1045 during the last fiscal year. As the World Bank states: ‘Each year on July 1, the World Bank revises analytical classification of the world’s economies based on estimates of gross national income (GNI) per capita for the previous year. The updated GNI per capita estimates are also used as input to the World Bank’s operational classification of economies that determines ‘lending eligibility.’ In view of this, it is not advisable to declare with so much fanfare that Bangladesh will attain the middle income status by 2021. The claim is not in sync with the current situation and should be abandoned. It is also not appropriate to include middle income status as a major goal of the 7th Plan. The nation certainly has sufficient local talent to define its own strategy of economic development and set its own goals.

A major reason for the earlier-than-anticipated graduation to the middle income status is the change of base year from 1995-96 to 2005-06 and the consequent revision of the national income data. This revision resulted in increasing the per capita GNI by about 14 percent, which has brought forward the graduation by a few years. A similar thing happened in Ghana in 2010 when it revised national income data. GNI per capita increased considerably, which led to its early graduation.

The UN uses a different income classification scheme; the UN category corresponding to low income of the World Bank is ‘least developed country (LDC)’ albeit the latter is a much broader concept. Graduation from LDC to a developing country depends on an economic vulnerability index (EVI) and a human asset index (HAI) in addition to GNI per capita. It will take much longer to come out of the LDC status both because it will take longer to qualify, and also because the graduation process itself is more involved. A good guess is that Bangladesh will be, barring unexpected developments, graduated when the relevant UN committee convenes in 2024.

There can be no question that Bangladesh should strive for a high growth rate, which is absolutely essential for an improvement in the standard of living of the general population. With the economy growing the country shall, sooner or later, graduate out of the low income and the LDC group. Graduation from LDC is a more significant economic event than the attainment of a middle income status. When Bangladesh graduates to a developing country it will automatically lose the GSP trade privileges including duty-free quota-free access that the most developed and some developing countries offer to LDCs. It will also lose some other benefits such as IPR exemptions. Bangladesh will have to compete in the international market at par with other developing countries such as China, India, and Malaysia. Hence, the graduation to a developing country will pose difficult challenges. Bangladesh should spend the time it has till graduation in working out how these challenges can be best met.

Table: GNI per capita of Bangladesh

Source: World Bank and BBS Data websites

Dr. M A Taslim is a Professor and Chairman of the Department of Economics, University of Dhaka.

During the early phases of economic development most people in a country find employment in agricultural and related activities. As other sectors grow with economic development, the share of the labour force engaged in agriculture starts declining, and that of industry and service sector rises. The shares of agriculture in Bangladesh in both total labour force and GDP have steadily declined (see Table 1). Agriculture accommodated nearly four-fifths of the labour force during the early 1970s. By 2010 the share came down to less than one-half. Over three-fifths of GDP originated in the agricultural sector four decades ago, but now the share is about one-fifth. However, this decline in the importance of agriculture in the national economy did not mean a reduction either of agricultural output or of employment. On the contrary, agricultural output grew quite robustly. Cereal output (rice and wheat) that stood at only 10 million tons in 1972-73 increased three and half times by 2010-11. Employment in agriculture also increased substantially.

The process of development in an agrarian economy with surplus labour was studied by Nobel laureate economist Arthur Lewis (1954). He hypothesised that the economy of a poor developing country, especially in Asia, was characterised by a large agricultural sector with an ‘unlimited’ supply of labour. The presence of surplus labour put a cap on both agricultural and non-agricultural real wage. Market forces drove down the agricultural real wage to a subsistence level. The nascent industrial sector could draw on the pool of surplus labour at this low wage. The profits of industries were reinvested such that the productivity of labour increased in the industrial sector. But since the wage rate was tied to the agricultural sector it remained low, thereby raising the profit rate in the industrial sector. The higher profits were reinvested to further increase the capital stock, which raised the profitability of the sector. The process continued until the surplus labour was exhausted. Beyond this point, the industrial sector had to compete with the agricultural sector for labour which resulted in an increase in the real wage rate. Thereafter the expansion of either the industrial or the agricultural sector or both could be achieved only at the expense of higher wages. Lewis termed this stage of development as the ‘turning point’.

There is some relevance of Lewis model for the economy of Bangladesh. Throughout the first three decades of its existence, its agricultural sector was dominated by subsistence farms and the supply of labour was plentiful. There is some evidence that agricultural wages hardly increased over the first three decades of Bangladesh’s existence. This is shown by the two real wage lines in Chart 1 below. There is some controversy regarding how the real wage index should be constructed. The controversy arises from the use of different deflators such as CPI or coarse rice price. Bangladesh Economic Review, published each year by the Ministry of Finance at the time of presenting annual budget, provide both nominal and real wage indices of hired labourers by several categories. However, Review’s agricultural real wage data are available only from 1977-78 and cease at 2008-09. The real wage graphs in Chart 1 were drawn by deflating nominal wage index data by GDP deflator and CPI data of Bangladesh Bureau of Statistics. These data were re-estimated with respect to a single base year 1969-70 by using the growth rates of the nominal indices. The two series move very close together.

The agricultural real wage suffered a very large drop in the aftermath of our Liberation War. In the four years between 1970-71 and 1974-75 the real wage declined by a whopping 43 percent. A horrific famine struck the nation in 1974-75 that resulted in a large number of deaths due to starvation and related causes. This very sharp decline in the real wage, caused largely by very large increases in food prices, especially rice prices, and a lack of employment opportunities, must have been the major contributors to the people’s misery.

Agricultural real wage rose by fits and spurts since 1974-75, but it did not attain the pre-liberation level until 1992-93 according to the CPI adjusted real wage index. However, it fell below the pre-liberation level again in 1994-95 and did not rise above that level until 2002-03. Both indices indicate that the agricultural real wage rose above its 1969-70 level by 2002-03.

The period of low agricultural wage coincided with the growth of the manufacturing sector led by readymade garment industry. Large scale migration to overseas destinations for employment began during the second half of the 1970s. Both these developments greatly influenced the pattern of economic development in Bangladesh.

The persistence of low wage greatly benefitted the growth of the RMG industry. Together with quotas and duty free access, the low real wage afforded large profits for the RMG entrepreneurs. These profits were ploughed back into the industry so that it grew rapidly in terms of both turnover and employment. From an almost non-existent industry at the beginning of the 1980s, it grew into the second largest exporter in the world in about three decades. Total garment export in 2013-14 stood at US$24.5 billion. The industry now employs nearly four million workers, mostly female. Overseas employment increased tremendously with an estimated nine million people, mostly unskilled labour, leaving Bangladesh to work overseas. Total remittances exceeded US$14 billion last year.

According to the Lewis model of economic development with surplus labour, agricultural wage can increase only if the industrial wage increases; that is, the driving force of the economy is the industrial sector. The real wage in the industrial sector suffered a greater decline relative to that of the agricultural sector in the wake of the Liberation War. Agricultural real wage (CPI adjusted) declined by 34.4 percent between 1971-72 and 1974-75. During the same period the industrial real wage declined by 56.2 percent. The large reduction in the industrial real wage must have had a negative influence on the agricultural real wage. It was not until 1985-86 that the industrial real wage exceeded that in 1969-70.

The most remarkable aspect of the real wage movement in agriculture is that for nearly three decades it moved up and down without showing any sustained increase such that the real wage in 2005-06 was barely higher than that in 1969-70. But since then it has been on rapid ascent; since 2007-08 the real wage increased by nearly one and half times within just five years. Never in the history of agriculture of Bangladesh was such a large increase achieved in such a short time. Importantly, the real wage increased continuously since 2004-05.

And in about the same time, the share of agriculture in employment fell below 50 percent.

This large and sustained increase in the agricultural real wage over the last eight years might be an indication of the exhaustion of surplus labour in agriculture. More intense cultivation of arable land, urban industrial growth, and in particular overseas migration seem to have drawn off the surplus labour. It would seem that the economy reached the ‘turning point’ of Lewis at around the mid-2000s. If so, Bangladesh has moved out of the subsistence economy phase with ‘unlimited supply of labour’ to a competitive economy where any net increase in labour demand is likely to see an increase in the real wage rate. An expansion of employment in any sector would now require an improvement in productivity.